Equity and Debt Financing

Topics: Debt, Credit, Finance Pages: 3 (878 words) Published: April 7, 2013
Difference Between debt and equity Financing
Debt Financing Equity Financing

DefinitionDebt financing refers to any borrowed money which theentrepreneur must pay back to the lending institution. It can come in the form of a loan, line of credit, bond, or even an IOU. An interest rate and other terms apply.Equity financing is money lent in exchange for ownership in a company.New businesses can use equity financing for their startups or when they need to raise additional equity capital to offset existing debt. Who depends on this type of capital?• Companies which are well- established and have demonstrated steady sales, solid collateral, and profitable growth often rely on debt capital for financing their businesses.• Companies with a more conventional approach to management, high profitability, and/or poor credit ratings often rely on equity capital for their funding needs. • Ideal form of capital for small businessstartups and newly launched companies since they have not established a solid track record of success and face uncertainty in their early stages of development. Where can I obtain this type of funding?• Commercial banks • Loans through the Small Business Administration (SBA)• Personal funds (bootstrap finances) can be obtained from savings, credit cards, retirement accounts, property equity, etc. • Friends and family can lend money for a stake in the company. • Angel investors and venture capitalists can also provide a new business owner with desired capital in exchange for a board seat, a stake in the company, and large return on investment. • Investment banking firms

• Insurance companies
• Large corporations
• Government-backed Small Business Investment Corporations (SBICs) Debt-to-equity ratioHigh (ideally, 1:2 or 1:1, depends on industry)Low Requirements• Exceptional credit history of borrower.
• Borrowers must show potential lenders they are willing to invest money in the business by using their own money.• Good-standing...
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